Question

Alternative Financing Plans

Frey Co. is considering the following alternative financing plans:

	Plan 1		Plan 2
Issue 10% bonds (at face value)	$1,880,000		$940,000
Issue preferred $1 stock, $10 par	—		1,560,000
Issue common stock, $5 par	1,880,000		1,260,000

Income tax is estimated at 40% of income.

Determine the earnings per share on common stock, assuming that income before bond interest and income tax is $564,000.

Enter answers in dollars and cents, rounding to two decimal places.

Earnings per share on common stock

Plan 1

$

Earnings per share on common stock

Plan 2

$

Answer 1

Ans:

	Plan 1	Plan 2
Ebit	564000	564000
Less : interest*	-188000	-94000
Ebt	376000	470000
Less : tax @ 40%	-150400	-188000
Eat	225600	282000
Total Funds available to both Equity and Preference shareholders	225600	282000
Less:preference Dividend	0	156000
Funds Available to Common Stock Holders	225600	126000
No of equity shares*	376000	252000
Eps	0.6	0.5
*working	Plan 1	Plan 2
Interest	1880,000*0.1	940,000*0.1
No of equity shares	1880000/5	1260000/5
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